India's Reliance Industries Joins the Oil Club

MUMBAI, India—Mukesh Ambani, one of the world's richest men, held a large beaker of greenish sludge in his hands, the first drops of light sweet crude that his company, Reliance Industries, has pulled from deep beneath the Bay of Bengal.

That sludge, Ambani says, is India's ticket to energy independence and Reliance's entry into the club of global energy majors. "This accomplishment marks a strategic and emotional inflection point for every Indian. It proves that we can disprove the naysayers of the world, who had written off India's ability to produce its own oil and gas," he said Sept. 21.

Reliance has started production as global oil majors are facing diminishing new discoveries and increasingly powerful oil companies—both private and state-run—from the developing world.

High-Tech Feat

Pulling oil from 8,000 feet beneath the cyclone-prone, choppy waters of the Bay of Bengal is a technological feat, the sort of high-tech, high-cost deep-water drilling that was once the province of just a few of the world's top oil companies. It also comes at a propitious time for India, the world's fifth-largest energy consumer. The nation imports about three quarters of its oil and has been staggering under growing oil and gas import costs and an onerous oil subsidy bill. Within 18 months, oil and gas production from block D6 of the Krishna Godavari basin will increase India's domestic production by 40%, potentially shaving about $20 billion from the nation's $77 billion oil import bill, according to Reliance officials.

The company says the 2,952 square mile block holds 2.5 billion barrels of oil equivalent, 80% to 85% of it natural gas.

India still ranks low on the list of oil-producing nations, and the find is unlikely to put a big dent in global demand for oil, which the International Energy Agency pegs at 86.8 million barrels per day.

Only the Beginning

But Reliance insists this is just the beginning. "India is not short of hydrocarbons. It just hasn't been explored well," P.M.S. Prasad, president of Reliance's oil and gas division, said on Sept. 21. Reliance controls 40 exploration blocks in India, including several more in the Krishna Godavari basin. Ambani called the start of production a "major victory" for India in its battle for energy security. "We can now confidently look forward to proRduction from a series of other fields," he says.

First, however, Reliance must resolve a very Indian problem: An increasingly high-profile fraternal dispute that pits Mukesh Ambani against his younger brother Anil, who has sued Reliance Industries over the gas deposits. Until that litigation is resolved, Reliance Industries, which expects to start natural gas production in January, can't sell a cubic foot of gas from the D6 block.

The brothers have long squabbled over their father's sprawling industrial empire, which was divided between them after he passed away six years ago. Prasad says he hopes India's courts—which are notoriously slow—will make a ruling soon. "We believe the court will make a decision in the near future. Someone will have to make a decision about whether we continue to transfer $20 billion of wealth a year," he said.

Court Must Rule

The Bombay High Court next meets Sept. 29 to consider the case. Canada's Niko Resources, which has a 10% stake in the project, and Reliance, India's largest company by market capitalization, have invested $8.7 billion in developing the block.